Asem forum to boost Asian Bond Market

Asem forum to boost Asian Bond Market

Pavin Chachavalpongpun, The Nation Asia News Network, Bangkok

Earlier this month, Asia and Europe shared an upbeat view of
the world economy at the end of the annual Asian-Europe Meeting
(ASEM) of finance ministers Meeting in Bali, Indonesia. One of
the highlights was Europe's endorsement of the Asian Bond Market,
designed to funnel Asia's huge pool of savings directly into
Asian investments. Further consultation on ways to strengthen
cooperation will be pursued at the ASEM foreign ministers meeting
today and tomorrow.

When ASEM was born in 1996, Asia and Europe recognized the
need to forge a new kind of cooperation. Unexpectedly, Europe
witnessed Asia's financial meltdown in the aftermath of the 1997
crisis. Europe saw how, behind the facade of economic success,
Asia was laid low by its vulnerability due to the lack of
regional financial stability.

Only recently have Asian economies made a comeback. When
Thailand announced the first "Asia for Asia" network through the
creation of the Asia Cooperation Dialogue (ACD) in 2002, Europe
was anxious to engage in a new partnership with ACD.

When Thailand initiated the Asian Bond Market development
under the ACD framework, the opportunity for such engagement
became clear. The launch of the first Asian Bond Fund, endorsed
by 11 Asian central banks, resulted in the pooling of reserves to
establish a US$1 billion (Bt43 billion) regional bond market.

Furthermore, at the recent ACD meeting, participants saw the
merit of having ACD financial experts explore the possibilities
of setting up Asian Bond Fund 2 to enable other Asian countries
to participate in Asia's own financial arrangement. India has
already expressed interest in putting forward $1 billion to start
up the Asian Bond Fund 2.

The concept of an Asian Bond Market was met with a favorable
response from European leaders. Pascal Lamy, the EU Trade
Commissioner, told Prime Minister Thaksin Shinawatra that the
Asian Bond Market was a very good idea for mobilizing regional
funds, for Asia to invigorate its own financial system and to
whittle away the region's financial vulnerability.

The premier stressed the need to keep Europe abreast of the
latest developments. He proposed through Asem last year a Task
Force for Closer Economic Partnership, with special emphasis on
the Asian-Euro Bonds linkage, the creation of a Euro Bond Market
in Asia and the use of the euro as a major currency in the region
-- all moves that would reduce Asian vulnerability from dollar-
denominated debt instruments.

The use of the euro as a reserve currency and as a means of
transaction in Asian financial and commercial markets would
enable Europe to make a greater contribution to the development
of Asia's new financial architecture, providing confidence and
financial security by spreading the risks from sudden shocks.

But Europe has cautioned that, at this embryonic stage, a lot
more needs to be done in the development of the Asian Bond. Asia
will have to make sure that it is able to stimulate a regional
convergence before proceeding to capital market integration.
Europe can help provide technical training to further refine
Asian capital market infrastructures, such as rating agency
standards, a settlement system, tax impediment, currency risk and
exchange control liberalization.

Europe's contribution to Asia's financial structure was
revealed during the first ASEM Task Force Meeting in May. The
outcome of the meeting reflected Europe's enthusiasm to form a
new forum for Asem to discuss the European experience in
financial integration, its successes and obstacles.

Participants from Europe pointed out that the prerequisites
for the realization of the Asian Bond Market include firm
political support from Asian leaders in order to achieve a
successful regional economic and financial integration, and
regional cohesion in the process leading to intra- and inter-
regional integration.

Thailand is fully aware of the significance of mustering
political support from other Asian leaders. On the one hand,
other cooperative frameworks have been promoting various aspects
of the Asian Bond Market's development. On the other hand,
Thailand has been emphasizing the role of the ACD as a forum
where political support of Asian leaders can best be expressed.

The success of the Asian Bond Market also depends very much on
the involvement of other players outside the region to guarantee
that this regional bond market complies with strict market-based
rules, the logic of good governance and institutional
transparency. The Asem Task Force is working hard to encourage
Europe to actively engage in the process.

To reaffirm their commitment to the Asian Bond Market, ACD
members adopted the Chiang Mai Declaration on the Asian Bond
Market Development during the second ACD Meeting as a guideline
for future development.

From a European perspective, it expects the future expansion
of the Chiang Mai Initiative from a regional outfit to a
multilateral arrangement. Europe sees its engagement in the Asian
Bond Market as a move to enhance existing strong ties between the
two continents through their cooperation under the ASEM
framework.

Europe wants to play an important role in Asian financial
integration, whereas Asia sees a need to get Europe involved so
that it can learn from the best European practices. This ASEM
Foreign Ministers Meeting will help Asia move forward the Asian
Bond institutional building process.

Dr Pavin Chachavalpongpun is an official in the Department of
International Economic Affairs, Ministry of Foreign Affairs.